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BOSWORTH v. EHRENREICH

June 8, 1993

JOHN BOSWORTH, Plaintiff,
v.
MELVIN EHRENREICH, JOHN SCALICE, and HI-PRO MARKETING, INC., Defendants.



The opinion of the court was delivered by: WILLIAM G. BASSLER

BASSLER, DISTRICT JUDGE:

 The plaintiff, John Bosworth, applies for a preliminary injunction under Fed. R. Civ. P. 65. One of the defendants, John Scalice, moves to compel arbitration under the Federal Arbitration Act, 9 U.S.C. § 1 et seq., and to stay this action pending the arbitration. For the following reasons, the Court grants in part and denies in part Bosworth's application for injunctive relief. Furthermore, the Court transfers venue to the Southern District of New York and dismisses as moot Scalice's motions to compel arbitration and stay the action.

 I. BACKGROUND

 This case involves a closely held corporation with three co-owners who recently have found it difficult to agree on how to run their business. Bosworth, Scalice and the defendant, Melvin Ehrenreich, each hold a one-third ownership of Hi-Pro Marketing, Inc., an Illinois corporation which manufactures "sculptured" sports cards. Under a Shareholders Agreement signed on May 1, 1991, Scalice was to serve as President, Bosworth as Vice-President and Ehrenreich as Secretary-Treasurer. For the past four months, however, these co-owners have engaged in various disputes. The alliances among them have continually shifted, in a corporate game of "musical directors' chairs."

 The problems apparently began seriously to affect Hi-Pro's corporate structure on February 10, 1993, when Bosworth and Ehrenreich asked Scalice to resign as an officer and director of the corporation. All three men that day signed a hand-written document entitled "Terms of Buyout," under which Scalice would purportedly "sell back all stock in Hi-Pro, Inc." (See Affidavit of Edward F. Clark, Esq., Exhibit B). Scalice, however, denies that he ever agreed to resign or sell back his shares, though he acknowledges that he did not participate directly in the daily activities of the corporation for nearly four months after the February 10, 1993 meeting. (Deposition of John Scalice, at 41).

 Bosworth and Ehrenreich found it hard to agree on how to manage the corporation in Scalice's absence. They met to discuss their differences on May 11, 1993, but were unable to reach a mutually acceptable solution. (See Declaration of John Bosworth, at 4-8). Bosworth asserts that "Ehrenreich's attitude toward me has been generally to keep me uninformed or misinformed." (Id. at 5).

 Scalice, meanwhile, on April 21, 1993 filed a lawsuit against Ehrenreich, Hi-Pro and Bosworth in the Superior Court of New Jersey, Chancery Division, Bergen County, claiming among other things that he never resigned from Hi-Pro, never accepted a buyout, and was entitled to have a receiver appointed for the corporation. The defendants removed this action to this Court under Civil Action No. 93-1855. *fn1"

 Despite his pursuit of legal remedies against Bosworth, Scalice nevertheless acknowledges that he was also attempting to work out an agreement with Bosworth, to the exclusion of Ehrenreich. Scalice and Bosworth would "ultimately buy [Ehrenreich] out, . . . or Mr. Ehrenreich would have been fired as an employee, kept on as a director and stockholder and just allowed to sit there." (Deposition of John Scalice, at 50). Scalice states that he and Bosworth called a director's meeting for May 11, 1993, later rescheduled for May 21, 1993, in which they planned, in Scalice's words, "to get rid of Mel." (Id., at 56-57).

 Ehrenreich, in explaining his shift in position, states that he wanted Bosworth terminated as an officer because Bosworth had taken certain actions on May 21, 1993 that "put the company in danger of financial ruin." (Declaration of Melvin Ehrenreich, May 24, 1993 at 2). In particular he alleges that Bosworth attempted to prevent the meeting from going forward by refusing to put through a call from Hi-Pro's Fort Lee, N.J. offices to Ehrenreich in Illinois and by hiring security guards to bar Scalice from entering the Fort Lee offices. (Id. at 3).

 Bosworth gives a quite different version of these events. He states that Scalice had arrived at the Fort Lee offices on the afternoon of May 21 with two attorneys and two private investigators. (Declaration of John Bosworth, at 3). Also present were attorneys representing, respectively, Ehrenreich and Bosworth. As Bosworth describes it:

 
5. [Bosworth's attorney, A. Fred] Ruttenberg told the others present that we considered the meeting invalid because Scalice had resigned as director. This position is consistent with the position which has been taken by Hi-Pro, Ehrenreich and me in the Scalice litigation [Civil Action No. 93-1855]. [Scalice's attorney William] Merker stated, however, that he was going ahead with the meeting and intended to telephone Ehrenreich. I refused to attend a so-called "directors'" meeting called by someone who was no longer a director of Hi-Pro and refused to allow Scalice to use the corporate offices for that purpose. I also refused to allow Mr. Merker to use Hi-Pro's telephones to call Ehrenreich.
 
6. Messrs. Merker, [Scalice's attorney Donald] Boles, [Ehrenreich's attorney Joseph] Fleischman and Scalice then departed and soon sent me a notice via telecopier from another location, announcing that the meeting was convening in Conference Room A at E.C.I., Inc., in Edgewater, N.J. My attorney and I did not attend that meeting.

 (Id. at 3-4).

 In any event, the parties agree that Scalice then contacted Ehrenreich by phone and the two men conducted a "director's meeting." At that meeting, the two men voted to terminate Bosworth's employment with Hi-Pro, to elect Scalice as Chief Executive Officer and Steven Merker, the brother of William Merker, as Chief Financial Officer and Vice-president. (Id. at 4).

 On that same day, Ehrenreich alleges, Bosworth sent a fax to Midwest Bank, "withdrawing all funds in the operating account and applying these funds to pay down a line of credit which had expired on April 2, 1993." (Id.) Bosworth allegedly knew that three checks had been drawn on the funds in the operating account, including a $ 300,000 check payable to the National Football League. (Id. at 2). Ehrenreich states that, to prevent the checks from being dishonored, he worked out an emergency agreement with the bank and an unnamed outside investor, "who invested $ 381,000 of his personal funds." (Id. at 3).

 Bosworth filed suit in this Court on May 24, 1993, seeking an order to show cause with preliminary restraints. The Court that day granted the application for preliminary restraints, setting a June 3, 1993 return date for a hearing on Bosworth's application for a preliminary injunction. The preliminary restraints enjoined Ehrenreich, Scalice and Hi-Pro from:

 
(a) terminating the employment of Bosworth with Hi-Pro;
 
(b) altering Bosworth's compensation;
 
(c) engaging in any transaction regarding the issuance, sale, transfer, pledge or other commitment of stock of Hi-Pro, without Bosworth's approval; and
 
(d) selling or disposing of any of Hi-Pro's assets other than in the ordinary course of business.

 After a discovery dispute arose among the parties, United States Magistrate Judge Dennis M. Cavanaugh on May 28, 1993 ordered that Ehrenreich make himself available for a deposition in Illinois on Memorial Day, May 31, 1993. Ehrenreich, however, did not comply with Judge Cavanaugh's order and has not yet been deposed. The Court has warned Ehrenreich and the other parties that it will not condone further disregard of such an order.

 Bosworth now applies for immediate injunctive relief. He alleges that the actions of the defendants at the May 21, 1993 meeting, at which he was purportedly terminated as a Hi-Pro employee, were "oppressive" under Illinois law. He seeks either a provisional director, appointed by the Court to resolve the deadlock on the board of directors, or, alternatively, to have his stock purchased at fair value by the defendants.

 Ehrenreich has filed a signed declaration in opposition to Bosworth's request for injunctive relief. Scalice has filed a brief and an affidavit of Edward F. Clark, Esq., in opposition. Scalice has also filed a motion to stay this action pending arbitration. He asserts that the disputes raised in Bosworth's verified complaint must be arbitrated in accordance with Article 13 of the Shareholders' Agreement.

 The parties also disagree on Scalice's status with the corporation. Bosworth argues that Scalice should not longer act as a director, as he resigned February 10, 1993. According to both Scalice and Ehrenreich, however, Scalice did not resign and continues to hold a director's position.

 II. DISCUSSION

 For the reasons discussed below, the Court agrees with Scalice that Bosworth's complaint is arbitrable and concerns issues which must be resolved by a New York arbitrator. This Court, however, does not have the power to compel arbitration outside the District of New Jersey. Under the Federal Arbitration Act, 9 U.S.C. § 1 et seq., any petition to compel arbitration or confirm an arbitration award must be filed in the Southern District of New York. The Court, therefore, transfers venue in this action under 28 U.S.C. § 1406(a) to the Southern District of New York.

 The Court, however, is extremely concerned about irreparable harm to the corporation Hi-Pro, and indirectly, to the three co-owners, Bosworth, Scalice and Ehrenreich, which will result unless the present state of corporate chaos is brought under some semblance of control. Therefore, the Court will appoint a provisional ...


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